Something cracked in the Canadian housing market.

A senior economist with BMO believes it’s the psychology that explains in part why residential properties are so pricey.

It’s called FOMO, or the fear of missing out.

It’s that powerful feeling of not wanting to be left behind.

“We’ve argued all along that there was a major behavioural aspect to what was happening in Canadian housing, where acute price gains were driven by FOMO, speculation and investment activity,” Robert Kavcic wrote in a post Sunday (July 17).

And then the Bank of Canada started raising rates this year, making mortgages more expensive.

As a result, housing sales began to drop, and prices showed signs of softening.

On July 13, the central bank unleashed a one percent increase, bringing its interest-setting rate to 2.5 percent from the pandemic-era low of 0.25 percent.

“In an abrupt turnabout, more Canadians now expect lower home prices ahead than higher prices, and that was before the BoC’s 100 bp hammer,” Kavcic observed.

Citing weekly survey data from Nanos Research, the BMO economist related that just 30 percent now expect higher prices as of the week of July 8.

This is how the level of expectation has “cratered” from almost 70 percent at the height of the COVID-19 pandemic boom.

“At the same time,” Kavcic wrote, “one-third now expect prices to fall (the low was around 5%, or basically nobody).”

The Bank of Canada has raised rates four times since March this year.

By taking a “hammer to housing”, the central bank has set up a correction to the market.

“The fact that the market had already cracked after the BoC’s initial move in rates only reinforced how sentiment-driven the market was, and how quickly that can change,” Kavcic wrote.

Variable mortgage rates are now around four percent, up from around 1.5 percent at the start of the year, the BMO economist noted.

Meanwhile, five-year fixed rates continue to hover around or slightly above five percent.

On July 15, the Canadian Real Estate Association reported that national home sales fell 5.6 percent in June compared to May.

As well, CREA noted that monthly activity in June 2022 came in 23.9 percent below the June record in 2021.

Meanwhile, the number of newly listed properties was up 4.1 percent month-over-month in June.

CREA also stated that the national home price index trended down 1.9 percent month-over-month, but was still up 14.9 percent year-over-year.

Also, the actual national average sale price marked a 1.8 percent year-over-year decline in June.

“Indeed, the proof is that even just an initial nudge in interest rates was enough to crack expectations and trigger a correction,” Kavcic wrote on July 17.

Referring to the July 13 interest in the central bank’s rate, Kavcic added: “The latest move by the Bank of Canada will wash away any remaining froth.”